I recently appeared in urgent proceedings for the voluntary administrators of  a company who may have been invalidly appointed.  The business run by the company had been the victim of obvious phoenix activity.   The administrators wanted to take action to confirm whether they were validly appointed, and were concerned that the company might revert to the control of the director with a real risk of the company’s business  being transferred to another entity.

What were the administrators to do?

The administrators had been appointed by a sole director (lets call her Ms Smith) of the company pursuant to s436A of the Corporations Act.  Ms Smith was essentially a nominal director who was appointed because the operator of the business was disqualified himself from acting as a director.  Ms Smith and the sole shareholder (lets call him Mr Jones) had fallen out with each other at about the time of the appointment.  It was allegedly the Jones camp who were seeking to “Phoenix” the company (for a third time as it turned out).

On the same day that they were appointed, the administrators made contact with Mr Jones and his lawyers.  Jones claimed the appointment was invalid.  The administrators immediately made an application to the Court for a declaration as to whether their appointment was valid, under s 447C.  They were concerned to act quickly in view of an impending first creditors meeting.

The administrators’ investigation in the days after their appointment made it clear that the appointment was invalid because Mr Jones had successfully removed Ms Smith as a director on the night before the purported appointment of the administrators.  This meant that the s447C application was no longer a solution, since that section does not allow the Court to validate an appointment which the Court determines is invalid.

Rather than withdraw,  the administrators did two things.

First, they expanded their application to seek an order validating their appointment relying on the very powerful Corporations Act provision, s447A (link).  Readers may recall that s447A allows the Court in its discretion to vary the operation of the Corporations Act as it applies to a particular company in Voluntary Administration.  In effect, the law as set out in Part 5.3A of the Corporations Act can be rewritten by the Court on application of a voluntary administrator and a range of other parties, including an “interested party”.

A line of cases has emerged over the past decade or more which makes clear that s447A can be used by a Court to validate an appointment of an administrator, even where the purported appointment was invalid and lacked power.  One of the most recent cases is National Australia Bank Ltd v Horne [2011] VSCA 380 (link).  In that case the Victorian Court of Appeal upheld a decision of Justice Sifris at first instance where his Honour used s447A to make an order validating the appointment of administrators who had been purportedly appointed by a chargeholder under s435C, which was found to be invalid because the chargeholder did not have security over substantially the whole of the company’s assets:  see Re Australian Property Custodian Holdings Limited (Administrators Appointed) (Receivers and Managers appointed) [2010] VSC 492 (link). The decision at paragraphs 31 to 35 reviews the authorities.

A question arose in our case as to whether the Court’s power under s447A should be used to validate an appointment which was in the interests of creditors (as in our case) but for which the purported appointor never had any authority to make the appointment at the time when it was made.   The basis for resisting the use of s447A in this way was a floodgates argument –  that any person could purport to be a person qualified to make an appointment, do so, and then have the appointees validate the appointment under s447A.  It is an interesting point and I will prepare a separate post about the issue.

Second, the administrators made a further application to wind the company up on the just and equitable ground, in view of the evidence of impending phoenix activity and the insolvency of the company.  The administrators had also been (validly) appointed as administrators of the second of the three companies that had been “Phoenixed” and that company had the necessary standing to seek an order under s461(1)(e).

Ultimately the proceeding settled before judgment, with Mr Smith agreeing to an order under s447A by consent, given the likely success of the winding up application.

Regards

Mark

(Thanks to Joanne Hardwick of Mills Oakley who was the instructor in the matter and provided input for this post)